How to read a balance sheet

A balance sheet is a list of how much a business has, how much a business owes to others, and how much is left for the owner(s).

The core accounting equation is Assets = Liabilities + Equity. This represents that everything a business has (assets), or was obtained by borrowing money (liabilities), an owner investment, or profits earned by the business (equity). 

A balance sheet proves that formula by presenting a list of account balances in a formalized structure, and these account balances represent the value of everything in the business as of a specific date. 

The most important thing to remember about a balance sheet is that it is a snapshot of a company’s financial position at a specific point in time.

A balance sheet answers questions like: Is there enough cash to pay off the accounts payable? Is the retained earnings negative, meaning a history of net loss? Comparing the balance sheet over multiple periods can give you even further insight into the performance of the business.

Assets

The first section of a balance sheet is Assets. This is everything of value held by the company. The order of accounts is most liquid* and shortest term to least liquid* and longest term. Many businesses will have bank accounts, accounts receivable, fixed assets, and accumulated depreciation in the asset section of the balance sheet.

Assets also include money in transit accounts (like Wave Payments that are in process), prepayments to vendors (like prepaid rent and prepaid insurance), inventory, and loans receivable.

*Liquid means easy to convert into cash. For example, stocks are a liquid asset, but your rare coin collection is not.

Liabilities and Equity

The next section of a balance sheet is Liabilities and Equity.

Liabilities are listed first, in the order of shortest term to longest term. Most businesses will have accounts payable and sales tax payable in the liabilities section; other common liabilities include prepayments or deposits from customers, wages and payroll taxes payable, and loans payable.

The Equity section is listed last, and will always include a line item for the current period net income or loss. Depending on the legal structure of the business, it could also include owner or partner equity, owner investment and draws, common stock, retained earnings, and additional paid-in capital.

You can click Show Details at the top & bottom of a Wave balance sheet to see each of these categories in further detail.

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